Working Capital Finance in India

 

WORKING CAPITAL FINANCE IN INDIA

Essential for All Upcoming Bank Exams

Introduction: 

For an uninterrupted functioning at a given capacity (to achieve a particular turnover level to remain viable and operate above the break-even level to earn required amount of profits), a firm requires a some minimum level of current assets. Working Capital means the total amount of the circulating current assets.

Working Capital Comprises	Means to finance
Value of stock in process;	Credit available from suppliers on purchase;
Value of raw material in store or in-transportation;	Short term borrowing;
Monthly expenses generally reflected through the current assets other than those at (a) to (d) such as cash, advances allowed, prepaid expenses etc.	Other Current liabilities;
Amount of outstanding receivables or sundry debtors;	Surplus of long term funds over the long term uses (i.e. net working capital)
Amount of consumable stores and other material required for production purposes;
Value of all finished goods including in transit;

Working Capital & Net Working Capital: 

Working capital or Gross Working Capital refers to the amount of total current assets. 

Liquid surplus or Net Working Capital refers to the surplus of long term sources over long term uses as per RBI prescription (also calculated by banks as difference between current assets and current liabilities). It is desirable that the net working capital should be positive which would signify liquidity and availability of adequate working funds. If in a particular case, the net working capital is negative, the difference will be called the Working Capital Deficit. 

Classification: 

The working capital can also be classified as – 

Seasonal working capital – 

It means requirement for additional current assets due to seasonal nature of the industry. 

Permanent working capital – 

It which is minimum amount of current assets necessary for carrying out operations for a period. 

Working capital gap – 

The total current assets less other current liabilities. It is financed by net working capital and bank finance for working capital (called MPBF). 

Fluctuating working capital – 

It represents additional assets required at different times during an operating period due to cyclic factors. 

Adhoc working capital – 

It means requirement of additional funds for meeting the needs arising out of special circumstances such as execution of special order, delay in receipt of payment of receivables. 

Working capital term loan – 

A long term loan is given to meet the working capital margin needs a borrower. The concept was introduced by Tandon Committee. 

Factors which determine the Working Capital: 

The following factors determine the overall working capital levels of the industrial units – 

• Pace of turnover. 
• Policies for production. 
• Credit Policy of the unit. 
• Seasonality 
• Manufacturing process.